The South Korean stock market is experiencing the steepest rise in the world, driven by a rally in artificial intelligence (AI) semiconductors. While domestic retail and institutional investors are pushing the index higher, foreign capital is quickly exiting the market. There are warnings that the stock market may be overheating as borrowing for investment increases.
According to Bloomberg, the KOSPI index has surged 87% this year, the highest among major global indices tracked by the outlet. The index's increase over the past year has reached approximately 200%. The total market capitalization of the South Korean stock market has grown to $4.6 trillion (about 6,850 trillion won), with Samsung Electronics surpassing a market cap of $1 trillion (approximately 1,490 trillion won), making it the second most valuable company in Asia.
At the heart of this surge is the semiconductor sector. The expansion of AI investments has led to a significant increase in demand for memory chips, boosting expectations for the performance of Samsung Electronics and SK Hynix. SK Hynix reported a fivefold increase in quarterly profits due to rising memory prices. President Yoon Suk Yeol's expectations for stock market support and financial reforms have also stimulated domestic investor sentiment.
Notably, retail investors are rapidly entering the market. Domestic individuals have purchased 37.7 trillion won worth of Korean stocks this year. Many who had been cautious for much of last year are now joining the AI rally. Domestic institutions have also joined the buying spree.
Loans for stock purchases have reached unprecedented levels. According to the Korea Financial Investment Association, the balance of loans for stock purchases was 36.3 trillion won at the beginning of May, a 32% increase from the end of last year. There are concerns that the actual scale of leveraged investments may be even larger when considering unreported loans.
The investment fervor is even spreading to accounts held by minors. Data from Toss Securities indicates that new account openings for individuals under 18 increased nearly tenfold in the first quarter compared to a year ago. Trading volumes have surged to record levels, and daily fluctuations of over 5% in the KOSPI have become more frequent. Bloomberg reported that the KOSPI has emerged as the index with the largest price swings among major global indices.
In contrast, foreign investors are pulling out of the South Korean stock market. According to Bloomberg, foreign investors sold off $11.5 billion (approximately 17 trillion won) worth of Korean stocks in May. If the current trend continues, May is projected to see the third-largest monthly outflow of foreign capital on record. In February and March, there were unprecedented levels of foreign exits.
The cumulative outflow this year has also been substantial. Foreign capital has exited the South Korean stock market by approximately $48 billion (about 71.5 trillion won) since the beginning of the year. If this trend continues, it could set a record for the largest annual outflow. The scale of foreign exits from the South Korean stock market is more than double the amount sold off in the Indian market, which is less directly connected to the AI investment trend.
Despite the foreign exit, some analysts believe that stock prices are not excessively high compared to earnings. Bloomberg noted that the KOSPI is trading at about 8.5 times projected earnings for the next year, which is lower than the 21 times for the S&P 500 index. Some Wall Street banks have raised their KOSPI targets to 8,500, 9,000, and even as high as 10,000 in optimistic scenarios.
However, the risk of a significant price drop following the surge has increased. Just the day before, Kim Yong-beom, head of the presidential office's policy office, mentioned the possibility of a 'citizen dividend' utilizing excess AI profits, leading to a loss of approximately $300 billion (about 447 trillion won) in KOSPI market capitalization within two hours. The stock prices later recovered more than half of that loss, and the government clarified that the statement was a 'personal opinion, not policy.'
The key issue in the market is whether the memory semiconductor sector has entered a long-term boom. Domestic investors are optimistic about further gains based on the expansion of AI demand and improvements in semiconductor performance. In contrast, foreign investors are wary of the potential for the memory market to continue its cycle of booms and busts.
* This article has been translated by AI.
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